1. Týnaz TÝTÝZ

Beyaz Nokta Vakfý Baþkaný

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The high inflation phenomenon, with which we have been living together in Turkey for the last 15 years, has created a confusion of concepts in addition to the subsequent economical and ethical disadvantages that it has caused.

It is the result of this confusion that the terms "high cost of living" and inflation are used interchangeably. The cost of living may be high even at zero inflation rate. If the productivity of the society is low, the income will accordingly be low; and this will cause the purchasing power of the individuals to be low. This is what we call "high cost of living", and is a relative phenomenon. "Cost of living " may be high for some people or groups but it may not be so for people with high income.

The confusion between financial straits and high cost of living is indicative of this conceptual chaos.

The way of living and/or life expectancy of a person with high productivity, thus with high income, may result in financial bottlenecks for him. It is a rather common phenomenon that a person who is problematic in his consumption ethics has financial bottlenecks. However, it is a fact that, whatever its source is, inflation weakens the purchasing power of all groups of people, whether they have high or low income; whether they are economizers or spendthrifts; whether they have high expectations or are decent people.

In case of inflation caused by conjunctures, these groups of people can overcome this temporary condition by cutting off their luxuries, by working more or by (and generally besides ) trying to economize more. What's more, it is not difficult to estimate that people will put away their savings when the conditions get better , and hence, will be prepared for 'hard times'.

Because such types of high inflation follow the fluctuations in 'business cycle', every dip will necessarily followed by a peak, by definition. On the contrary, a long period high inflation - which we can call chronic inflation - is completely different from the former, which we can call cyclic inflation.

In Turkey, both kinds of inflation have existed side by side for the last 15 years. Cyclic inflation has been fluctuating according to its own parameters, and chronic inflation continues to exist at an almost constant level. The resultant inflation at any time, on the other hand, is the summation of these two types of inflation.

The main cause of cyclic inflation can easily be explained in terms of the business cycle concept. At a specific balance between demand, supply, wages and prices, making new investments cause an increase in the purchasing power; and the increased purchasing power in turn increases the demand for goods and services. Since suppply is constant, the prices increase and this in turn decreases the demand, causing stagnation. The inflation during the periods when prices increase is the type of inflation which we name as cyclic inflation above.

On the other hand, chronic inflation arises due to a number of reasons different from the above; and it influences the reasons that cause it to arise, thus, further increasing the rate of inflation. In other words, a spiral phenomenon is created. There are some preventive factors that stop the continuation of this spiral into infinity; and in case these factors are weakened and/or the factors creating the inflation are strengthened, the phenomenon which is called 'hyper inflation' arises.

The reasons creating chronic inflation can be grouped as follows:

  1. The society consumes more than it produces;
  2. An increase in price turns back and reinforces itself.

Under the first group, there are various causes : mainly a high rate of increase in population; not being able to catch up with technological development; inadequate consumption ethics; productivity which is not able to follow the desire to increase living standards; inflation exportation (by products such as petroleum); corruption in the cadres in public institutions and offices against unemployment; budget deficit in Public Financial Institutions; public expenditures consisting of items such as infrastructure investments; and similar causes.

If every cause is separated into sub-causes, finally we will be able to reach the original causes, which are the 'roots 'of the others. This first group of causes are those which are stated in public opinion , albeit individually. Meanwhile, the point to be criticized here is that a 'programme' (package) consisting of the solutions put forward integrally to tackle these causes have not been defined and, hence, have not been applied in determination.

The second group of causes is the 'snowball effect' which has not been underlined, let alone underlining, has been denied to exist, up to now. In other words, the effect of a price increase to re-inse itself !… The reason why this effect is denied is the fact that a research which will make people realise its dimensions has not been conducted in Turkey.

The first study that can give an opinion on the potential dimensions of this impact was done and published in 1990.* Analysis made on a hypothetical Input/Output table demonstrated that this impact, which has been supposed as 'negligible' up to now, is in fact very important.

A set consisting of 10 products thought to represent basic goods and services on the market has been defined and some weights have been appointed for the products in this set. In the first trial, made without taking the snowball effect into account, a 10% increase in price has been tried and an inflation rate has been calculated using the mentioned set. This rate was found to be 5%. In other words, the price increase on petroleum has increased the general level of prices by 5%. Naturally, it must not be forgotten that this rate depends on the dependencies of the products on each other, and these dependencies are variable.

In the second trial, the snowball effect has been taken into account (and this is the real situation), and it has been seen that a 10% increase in petroleum price increases the general level of the prices by 15%. Hence, the snowball effect multiplies the price increases by three.** And, it is this fact that can not be estimated beforehand.

How to make use of the model

Those who involved in the management of economics need a simulator that can produce detailed information on the sensitivity of the I/O table to various changes.

As long as the answers to the questions, " Which goods or service products are sensitive to increases in price? How sensitive are they?" are not known, a 'snowball' phenomenon can start as a result of unexpected reasons. Such a model can be used for a general purpose of this kind.

On the other hand, it is natural that in the real I/O system that makes up the economy, some products are 'more effective' and/or 'less sensitive' than others. A product which is the input for a high number of products will be 'more effective' while a product which uses a high number of products as input will be 'more sensitive'. These two groups can collectively be called as 'Critical Products'.

A portion of the 'Critical Products' are known: for example, products such as petroleum, electricity, labourer's wages… However, it is impossible to know all the critical products fully without carrying out detailed analysis on the I/O table. It is impossible to comprehend fully the possible consequences of increasing some unremarkable inputs( such as taxes, duty fees, tolls ) on the cost of critical products, even if in small amounts, without making the necessary analysis on the I/O table.

The most interesting result of the model is the phenomenon of price discount. The avalanche impact caused by the increases in prices may similarly arise as a result of a price discount. Below are given the Snowball Effect Multipliers caused by 10% price increase and 10% price discount on various products:


product no. product name 10% price 10% price

increase discount

1 petroleum 15.0 -18.0

2 electricity 9.7 -11.0

3 labourers' wages 16.5 -21.8

4 transportation 8.1 -9.3

5 iron-steel 1.1 -1.15

6 rent 13.3 -17.1

7 newspaper 1.2 -1.25

8 water 6.1 -6.3

9 land 0 0

10 bread 6.8 -7.5

The fact that some critical products give rise to a price discount in the general level of prices larger than the discount made in the product can be used as a very effective tool in the combat with inflation, if this discount can be carried out.


One of the reasons of the inflation in our country -but an important one- is the 'price increase spiral' examined here. This inflation is similar to the periodic inflation caused by the business cycle in economies which are relatively closer to Full Competition only in the name.

Price changes in a number of Critical Products, which will be determined by this method of analysis, which should be placed in the first rank among the tools to be utilized in combatting inflation and must be closely followed; and interventions to stop the snowball effect must be carried out when necessary, without disturbing the principles of the free market economy.

There is no doubt that new visions in The Combat with Inflation, will undoubtedly be placed among the first ranks in the agenda of the new government.

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